Are we running out of microchips?

Bangladesh stepped into the era of fifth-generation (5G) internet last December, a cutting-edge tech, set to serve as the backbone of automation and cloud computing at the industrial level, while allowing consumers faster access to services such as remote learning and telemedicine.

However, the same year, something strange started happening in different industries across the globe. For example, features, packages and even certain parts suddenly disappeared from recently manufactured vehicles in the USA.

Peugeot 308 hatchback owners were surprised to find the digital speedometer shown on TV advertisements replaced with an old-fashioned analog version. Meanwhile, the dashboard display on the Renault Arkana mysteriously got a little smaller.

This is not a case of deceptive marketing. An average car is made up of about 30,000 individual parts, yet many US automakers were missing only one component worth $4 or $5, one-hundredth of a per cent of a car’s final selling price– microchips.

A global shortage of semiconductors – the chips that power virtually every electronic device, from rice cookers to Xboxes – has put the industry in an awkward situation.

According to Goldman Sachs, semiconductors touch 169 different industries, and total damage to the US automakers could be upwards of $60 billion. However, the crisis goes beyond just cars.

Sony does not expect to meet demand for its PS5 until 2023, Nintendo cannot make enough Switches, and even the deep-pocketed Apple, usually immune to such disruptions, has been severely impacted.

Many smartphone brands raised prices, reduced production of budget models, or outright pulled devices with lower price tags from the market to focus on their top of the line products – leaving mid and low income consumers in the lurch.

What caused the shortage?

The semiconductor industry found itself under spotlight when chip shortages first shut down automotive production lines across the globe in 2021.

We live in a semiconductor world, and the gravity of this situation became more apparent to consumers when high-tech and electronics companies began to experience chip shortages, and voiced concerns about supply chains.

A number of problems triggered the semiconductor shortage. This particular industry already had long-standing issues, such as insufficient capacity of semiconductor fabricators, but the Covid-19 pandemic introduced unprecedented challenges.

When governments around the world began imposing Covid-19 restrictions throughout 2020, the demand for cars plummeted. At the same time, sales of home electronics skyrocketed – routers, monitors, webcams, keyboards, iPads, and so on.

Car companies canceled their semiconductor orders, consumer electronics brands ordered extra, and to the extent the two overlap, production lines shifted to producing for the latter.

Automobile sales, however, jumped back much faster than expected — almost as fast as they had fallen in March 2020. Already by September that year, demand for cars was near 2019 levels.

Not used to such wild swings in demand, when Americans got back to their usual habit of buying trucks the size of small European countries, car manufacturers rushed to order more parts. But the problem is that “semiconductor” and “rushed” are practically antonyms.

There is nothing fast about producing billions of transistors on a single chip or maintaining conditions 100,000 times more sterile than a hospital operating room. When you hear microchips have extraordinarily long lead times, think not days or even weeks, but months.

A chip takes at least 14 and as many as 20 weeks just to manufacture. After that, you can expect an additional 6 weeks for assembly, testing, and packaging.

This estimation also assumes the machines are sitting around, ready to start the moment an order is received, and does not include delivery time.

A lingering crisis

So, the manufacturing process of all semiconductor chips takes at least three to six and a half months from start to finish. But if it were that simple, supply would have caught up with demand months ago. Instead, some analysts do not expect the shortage to end until later this year, or even the next year.

There is one crucial factor we have to consider as well. The semiconductor supply chain is not just slow, it also involves many different parties. Steps, which would be separated only by conveyor belts or departments in other industries, are far more complex for semiconductors – justifying entirely different, highly specialised companies. And, while efficient, specialisation can also cause problems.

Imagine, for instance, last September when MSI saw its high performance graphics cards start to fly off the market shelves – it would have immediately adjusted its sales forecast accordingly.

If sales the previous month were 18 million, MSI would have extrapolated a trendline and added some cushion – ordering, let’s say 20 million microchips. But remember, MSI’s order does not just go directly to a factory.

Instead, it might go to a company like Nvidia, which might be responsible for delivering the graphics processing units. Nvidia, on the other hand, will see an order of 20 million units, extrapolate, and add some cushion – maybe ordering 21 million.

By the time an actual manufacturer, or microchip fabricator, receives an order, it may bear little resemblance to the original demand. Each step of the process involves an independent, profit-maximizing firm, making the most logical decision given its limited information.

In aggregate, however, demand gets more and more distorted. Under normal conditions, this effect is known and manageable. But when orders come flooding in all at once, as they did in September, manufacturers are very easily overwhelmed.

And because demand shot up everywhere at once, every company is effectively competing for the same, limited supply. Each one, trying both to minimize the risk of under-ordering and maximise its priority in line, inflated its order.

For manufacturers, the difficulty is not so much solving the shortage – with lead time so long, there is really nothing that can be done except build more factories, which takes years.

However, the very nature of semiconductors all but guarantees the dominance of a small number of companies. Opening a new factory easily costs upwards of $10 billion, and as much as twice that for the most cutting-edge.

With capital costs this high, it is simply not possible for new companies to dip their toes in the market. Over time, the number of competitors has dwindled, from 25 in 2002 to just three by 2016.

While not, strictly speaking, a monopoly, Taiwan Semiconductor Manufacturing Company (TSMC) is the clear winner in the contract foundry market — which produces on demand for companies such as Apple and Toyota.

That is a lot of very important eggs in one basket. Especially given that over 90 per cent of TSMC fabricators are located in one politically fraught country – Taiwan.

Though microchip demand continues to soar, there is no end in sight to the global shortage – triggered by a perfect storm of pandemic and trade war, and made worse by political unrest in Taiwan and Russia-Ukraine war that could very well bring about a nuclear Armageddon.

It is about time we stop considering microchips as cheap, easily available components, and start treating them as valuable resources with a finite supply, before our dream of a digital nation is sidelined.

The writer is a journalist.

He can be contacted at sairas.rahman@gmail.com